The New Arthurian Economics

Tuesday, March 14, 2017

The most that the natural-rate hypothesis can tell us is that if an economy is operating at its natural rate of unemployment, monetary expansion cannot permanently reduce the rate of unemployment below that natural rate. Eventually — once economic agents come to expect that the monetary expansion and the correspondingly higher rate of inflation will be maintained indefinitely — the unemployment rate must revert to the natural rate.

I wish economists would stop focusing on "monetary expansion" and start focusing on the ratio of accumulated debt to the quantity of credit creation. Because changing that ratio changes the natural rate.